Digimarc Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 13, 2024

There are 5 speakers on the call.

Operator

Greetings, and welcome to the Digimarc Corporation's 2nd Quarter 20 24 Financial Results Conference Call. Presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, George Karamanos. Thank you.

Operator

You may begin.

Speaker 1

Welcome everyone to our Q2 conference call. Riley McCormick, our CEO and Charles Beck, our CFO are with me on the call. On the call today, we will provide a business update and discuss Q2 financial results. This will be followed by a question and answer form. We have posted our prepared remarks and our quarterly earnings snapshot in the Investor Relations section of our website and will archive this webcast there.

Speaker 1

Before we begin, let me remind everyone that today's discussion contains forward looking statements that have risks and uncertainties. Please refer to our press release for more information on the specific risk factors that could cause actual results to differ materially. Riley will now provide a business update.

Speaker 2

Thank you, George, and hello, everyone. I want to begin this call by reiterating the core tenants of our strategy. When we get to the subsequent discussion of Q2, I encourage you to examine our progress with these core tenants in mind. Doing so will help frame accomplishments we achieved in the quarter and more importantly provide context as to where we're going from here. As our world becomes increasingly digital and companies progress their digital transformation journeys, Digimarc maximizes the ways in which products and multimedia could digitally interact with the various systems that surround them.

Speaker 2

We excel at the identification and authentication of goods to digital assets, often at massive scale and often where other means of identification or authentication don't work well or don't work at all. Our focus is on converting this large total addressable market into substantial free cash flow by positioning ourselves to deliver high and long lasting top line growth at world class operating margins. This starts with our being easy to begin doing business with an excellent guiding customers along their Digimarc journey and is aided by 4 key tailwinds we have been very intentional to create. 1, our incredibly deep and wide moats allow us to offer differentiated products. In turn, our differentiated products enable us to create new markets and disrupt existing ones.

Speaker 2

2, the need to identify and authenticate physical goods and digital assets is universal, meaning almost every entity in the world is a potential Digimarc customer. Additionally, because our technology enables us to identify and authenticate things or other solutions don't work well or don't work at all, ecosystem consists of companies incentivized to partner with us rather than posing a competitive risk. 3, there are many use cases that require companies to identify or authenticate their physical items and digital assets and there are many ways we can configure our technology to achieve these goals. Therefore, our ability to productize new functionality is open ended. This means our already large TAM will continue to grow as we either launch new products or add opportunity unlocking functionality to existing ones.

Speaker 2

4, we engineer our products to be accretive, meaning the more Digimarc products a customer buys, the more value each product delivers. This positions us to harvest a low hanging and highly profitable fruit of cross sells and upsells for years to come. Turning now to Q2, we made significant progress on multiple fronts, highlighted by 3 developments likely to have a profound impact on the second half of this year and beyond. Before providing these important updates, I want to reiterate 2 points. 1st, because we are early in the journey to our ultimate and massive scale, our net annual recurring revenue growth can be lumpy when looked at a quarterly basis.

Speaker 2

As a reminder, quarterly net ARR growth is the output of gross addition to ARR minus churn. In Q2, churn almost entirely offset our gross add. A significant driver of this dynamic was a transition of our preferred partner engagement model to our new center of expertise program. While this transition results in less upfront ARR, it leads to 2 significant benefits that should pay off for years. Greater ARR upside over time and more focused, repeatable, scalable and profitable growth.

Speaker 2

2 things to note on this transition and this impact in our quarterly net ARR results, both in Q2 and beyond. First, even with the headwind of lower upfront ARR, we slightly exceeded the Q2 gross ad target set in our 2024 budget. 2nd, as of the end of Q2, the partners that remain in our historic partner program are not candidates to transition to our COE program. On our February call, we discussed the reasons why we believe so strongly in the COE program and in the June press release, we announced the program's founding members. Over the past few months, we've become even more convinced of the power of this new program and beyond the positive impact it is already having on our sales pipeline, I'm thrilled to announce we closed our first COE source contract during the quarter, a multiyear Digimarc Validate deal.

Speaker 2

2nd, and as evidenced by our historic results, while this lumpiness will lead to quarters like Q2 where quarterly net AR growth is below trend, it will also lead to quarters where quarterly growth is significantly above trend. When we say we expect our business to be lumpy until we reach a larger scale, we use that term as it is truly intended, not as a euphemism for weak. This is why we prefer to measure our ARR over 1 year and 3 year time horizons as we do with the quarterly earnings snapshot George referenced in his opening remarks. Focusing on the forest, not the trees provides a better measure of this business of our businesses true growth. Moreover, our focus extends beyond any single quarter and as I mentioned at the beginning of this call, is centered on converting our large total addressable markets into and preview a new market opportunity that and preview a new market opportunity that presents a TAM as large as, if not larger than, any other opportunity we are pursuing.

Speaker 2

As a reminder, we view our business as having 3 pillars of shareholder value. The first pillar is our long standing relationship with the world's central banks. Beyond the meaningful cash flow this 26 year relationship provides, our work with the central banks also acts as a source of intellectual property generation for our commercial business, gives us invaluable credibility as a trustworthy supplier and demonstrates our ability to scale. The second pillar comprises of our SaaS and PaaS products that follow a more traditional software go to market model in areas such as deal size, sales cycle and lack of ecosystem dependencies. I touched briefly on the progress in our COE program earlier.

Speaker 2

For additional important updates from Q2 related to this pillar, I again encourage everyone to review our quarterly earnings snapshot. The 3rd pillar consists of our ecosystem driven opportunities. These opportunities encompass industry wide or country wide initiatives that once in motion have powerful flywheels that should drive quick, broad and sticky adoption, but also have ecosystem dependencies that make timing unpredictable as it is predominantly outside of our direct control. Before I provide an update on our progress in these 2 in 2 of these opportunities, namely Digimarc Retail Experience and Digimarc Recycle, I again want to point everyone to our quarterly earnings snapshot for an update on our 3rd ecosystem driven opportunity, Digimarc Validate Media, which we continue to believe can deliver the safer, fair and more authentic Internet we all deserve. Turning to the update on Digimarc Retail Experience, recall this offering is a razor razorblade product.

Speaker 2

The razor involves licensing our Digimarc Illuminate platform to retailers who use its capabilities to build out the points of detection required to enable next generation in store operations. The razor blades are provided by our licensing Digimarc retail experience to the brands whose products are carried by that retailer, including the retailer's private label brands, allowing their products to interact with these points of detection. As stated on a prior call, we believe the TAM of licensing our platform to enable next and store operations is well into the nine figures of ARR. We believe the TAM of Digimarc Retail Experience is multiple larger still. But beyond these incredibly large TAMs, Digimarc Retail Experience is also an easy way for these national brands to begin their Digimarc journey on mass.

Speaker 2

Once their products are digitized, we will have the opportunity to be excellent at adding these brands along their journey of solving additional problems through the adoption of other Digimarc solutions. Moreover, the more national brand items digitized using our technology, the easier it is for additional retailers to license our platform to build out their own points of detection, while in parallel adopting Digimarc refill experience for their private label items. We expect most retailers will use our platform to build points of detection that utilize other means of product identification beyond the 1D, 2D and digital watermarking signal that our platform supports. In Q2, we provided our largest commercial customer with demonstrable proof that our technology can carry a very heavy load in this multi signal future, resulting in 2 important developments that give us confidence this flywheel is likely to start spinning. First and most immediately, we believe this customer now understands that the more items in their stores that are digitized with our technology, including items produced by National Brands, the more profound the improvement to their in store operations will be.

Speaker 2

2nd, we believe this customer also now understands the value of Digimarc delivering a greater amount of the software capabilities powering their points of detection. This should ultimately increase the size and time to market of the razor component of the supply bill, not only with our initial customer, but with subsequent customers as well. While I cannot provide any additional details at this time, I want to emphasize 2 key points. 1st, it is difficult to overstate the importance of Q2 saw us make important progress on this ecosystem driven opportunity as well. Q2 saw us make important progress on this ecosystem driven opportunity as well.

Speaker 2

On our February earnings call, we discussed a new go to market avenue for this revolutionary product in which we would work with a qualified partner who would lead a regional or countrywide rollout. On our May call, I mentioned we were in conversations with multiple parties regarding this new path. Since then, the number of parties with whom we are having conversations has increased as has the number of countries in which we are having these conversations. Moreover, thanks to a deeply valued ecosystem participant who believes as strongly as we do in both the environmental and economic ROI of our solution, we expect to soon receive introductions to multiple large and powerful entities capable of acting as our partners in additional countries. While we expect these will be elongated sales cycles, we are pleased with the progress and believe that the opening of our first country should accelerate our conversations, both existing and future.

Speaker 2

To that end, the 1st qualified partner with whom we entered conversations has told us they expect to be ready to sign a deal for the initial rollout of Digimarc Recycle in a European country in the second half of this year. Finally, in breaking with our practice of not discussing new products until we signed a marquee customer, I want to close my prepared remarks today by talking about a new market opportunity because of our confidence in the value of our solution and the materiality to our business if we are correct. For over a quarter of a century, we have worked at the world's central banks to protect their currencies. However, one of the fastest growing and most pernicious attacks on the class of currency isn't against the banknotes issued by federal governments, but the currency issued by brands and retailers, gift cards. As I've mentioned in the past, we expect our most exciting opportunities to come from prospects experiencing problems that could be uniquely solved by our ability to identify and authenticate physical and digital items where other means of identification and authentication don't work well or don't work at all.

Speaker 2

It is then incumbent upon us to determine A, if there is a sizable and repeatable business problem that B, additional prospects beyond the first have an urgency to solve or C, we can provide a solution of enduring and differentiated value that D presents us a path to fast and profitable scale. This is exactly how our opportunity in gift cards has developed. Gift cards face multiple attack vectors and the cost of these attacks, both monetary and reputational, are real and are getting worse. Moreover, existing solutions are expensive and ineffective and it is becoming clear to the industry, both ecosystem partners and end customers that we have a significant role to play. We believe we can provide a solution today that addresses some of the most common attack vectors, providing a significant increase in efficacy while actually reducing the current build materials costs, delivering a meaningful and attractive ROI.

Speaker 2

That combined with the expected ease of implementation should allow for rapid scaling post initial adoption. Moreover, while no material dependencies prevent any single gift card issuer from independently adopting our solution, many industry participants are aware of our work and are interested in finding a widely adoptable solution as a large and growing level of loss is leading to grave concerns in the industry. Thus, our opportunity in the gift card industry shares the most attractive attributes of our ecosystem driven opportunities, namely the likelihood of rapid scaling and incredible stickiness once scaled without the multi stakeholder dependencies that characterize these opportunities as ecosystem driven. We are likely to launch our gift card offering with a few different implementation architectures that we believe yield a U. S.

Speaker 2

Market camera near from $900,000,000 to $1,500,000,000 of ARR. While we are starting in the U. S. Because this is where our initial prospect and partner engagements have occurred, there is nothing that we or the industry see that prevents us from being a global solution. In fact, as stated earlier, our ability to act as a universal and global solution seems to be one of the things by which the industry is most excited.

Speaker 2

Although we haven't yet conducted a detailed analysis to quantify the global TAM, it will be significantly larger than that of the U. S. Alone. Moreover, as we continue to build additional features into our solution to address more attack vectors, we believe we should be able to capture a share of that added value, providing further upside to our TAM. While the excitement and urgency shown by the industry has been remarkable, there is still more to learn as we advance this work and I want to caution, we don't know what we don't know.

Speaker 2

However, the list of things we don't know is shrinking rapidly, giving us comfort in discussing this opportunity today. In addition to our obvious excitement about this opportunity standalone, it also dovetails nicely with other retail loss prevention solutions we are progressing, including a solution addressing the theft of prepared food for which we signed an initial deal with a regional grocer in Q2. I focused my comments today on the gift card opportunity because of the urgency with which the industry is engaging as well as the massive TAM it represents. However, it is important to note that the potential to offer a suite of value accretive products leveraging the same technology and sold to the same loss prevention buyers is exciting as it provides us another avenue to be easy to begin doing business with and excellent guiding customers along our Digimarc journey. Finally, while not an immediate focus, we believe there are future synergies that can be unlocked between our retail loss prevention offerings and Digimarc retail experience, as retail loss prevention and retail operations are closely intertwined.

Speaker 2

We will keep you updated as things progress. I will now turn the call over to Charles to discuss our financial results. Thank you, Riley, and hello, everyone. Financial highlights on a year over year basis for the Q2 included: ending ARR increased 44%, commercial subscription revenue increased 39%, subscription gross profit margin was 89%, a 5% percentage point improvement. Total expenses only increased 2% and non GAAP net loss decreased 14%.

Speaker 2

We continue to focus on delivering improvement in these financial metrics as they're critical levers in reaching positive free cash flow. Ending ARR increased 44 percent from $16,700,000 at the end of June last year to $23,900,000 at the end of June this year. The year over year increase in ARR largely reflects the impact of new customer contracts and several important customer upsells, partially offset by customer churn. Total revenue for the quarter was $10,400,000 an increase of $1,600,000 or 19 percent from $8,700,000 in Q2 last year, reflecting strong growth in subscription revenue. Subscription revenue, which accounted for 61% of total revenue for the quarter, grew 36% from $4,700,000 to $6,400,000 The increase reflects subscription revenue recognized on new customer contracts as well as up sells on existing customer contracts.

Speaker 2

Commercial subscription revenue grew at an even higher rate of 39%. Service revenue decreased 1% from $4,100,000 to $4,000,000 reflecting slightly lower commercial services. Subscription gross profit margin improved from 84% in Q2 last year to 89% in Q2 this year, representing a 5 percentage point improvement. The significant increase year over year reflects both the strong growth in subscription revenue and a favorable mix in subscription revenue to our newer products. Service gross profit margin improved from 51% in Q2 last year to 58% in Q2 this year, reflecting a favorable change in labor mix.

Speaker 2

We expect to generate mid-fifty percent service gross margins on a normalized basis with some fluctuation quarter to quarter. Operating expenses for the quarter were $16,800,000 compared to $16,100,000 in Q2 last year, an increase of 4%. Roughly half of the increase was due to lower costs being allocated from operating expenses to cost of revenue this quarter due to lower billable services. Total expenses, which exclude the impact of allocations, only increased 2% year over year. Comparing this number to the 39% growth we delivered in commercial subscription revenue shows the operating leverage we've been focused on building into our business.

Speaker 2

To continue driving this considerable operating leverage, we're focusing on maximizing our productivity and efficiency as an organization, including better leveraging the capability of tools like GenAI to minimize the impact of rising labor and other costs. Non GAAP operating expenses, which exclude non cash and non recurring items, were $14,000,000 for the quarter, up 8% compared to $12,900,000 in Q2 last year. Again, roughly half of this cost was due to lower costs being allocated from operating expenses to cost of revenue this quarter because of lower billable expenses. Net loss per share for the quarter was $0.43 versus $0.53 in Q2 last year. Non GAAP net loss per share was also considerably lower for the quarter at $0.23 versus $0.29 in Q2 last year.

Speaker 2

We ended the quarter with $41,500,000 in cash and short term investments. Free cash flow usage was $6,900,000 for the quarter compared to $7,900,000 in Q2 last year. Given the cash flows can fluctuate quarter to quarter depending on the timing of receipts and payables, we continue to believe that a good proxy for a normalized level of free cash flow is using non GAAP loss plus capital expenditures. While cash burn in the first half of twenty twenty four was above this proxy, we expect the unfavorable fluctuations on timing of receipts and payables to reverse in the second half, leading to full year cash flow being generally in line with this proxy and hence free cash flow in the second half to be much better than the first. For further discussion of our financial results and risks and prospects for our business, please see our Form 10 Q that will be filed with the SEC.

Speaker 2

I'll now turn the call back over to Riley for final remarks. Thanks, Charles. In Q2, we made significant progress on multiple fronts, highlighted by meaningful development in 2 of our ecosystem driven opportunities and the rapid progression of an attractive new market opportunity in protecting gift cards from the ever increasing threats they face. The developments in the ecosystem driven opportunities give us confidence that we are likely on the precipice of getting these 2 flywheels spinning. The rapid progression of our opportunity in gift cards is standalone exciting and can also serve as a cornerstone for a broader suite of offerings to help retailers combat one of their most pressing business challenges, the ever increasing prevalence and cost of shrink.

Speaker 2

While we continue to expect our business to be lumpy until we reach a larger scale, the progress we made in Q2 further demonstrates that as a result of our laser like focus on the execution of our strategy and the core tenants therein, we are not only on track to unlock the massive TAMs on which we are focused today, but also that new TAMs can rapidly develop. We are positioning ourselves to convert our large total addressable markets into substantial free cash flow by delivering high and long lasting growth at world class operating margins. Our progress in Q2 gives us even greater confidence in our ability to achieve this goal. Operator, we'll now open the call for questions.

Operator

Thank you. At this time, we will be conducting a question and answer Our first question comes from Joshua Riley with Needham.

Speaker 3

All right, great. Thanks for taking my questions and nice job on developing some of these product opportunities here in the last couple of quarters. Maybe just starting off on net new ARR. Can you just give us some additional details on maybe what type of customer churned in the quarter? Did you consider them core to the business?

Speaker 3

And maybe how the center of expertise program for partners impacted net new ARR in the quarter?

Speaker 2

Yes. Thanks for the question. Most of the churn was specifically related to transition of our COE program. So as Riley stated in the prepared remarks, we don't expect to see any more customers be moving in a CoE program. So we expect that most of that is behind us at this point.

Speaker 2

Yes, Josh, maybe if I double click on that just quickly. Our traditional program, the BAW program, there were 2 types of partners we had in there. We had the big partners who were technologically capable and really wanted to use illuminate to build their own products and services on top And then we had a bunch of partners that maybe had less interest in building things, wanted access to our technology because they had a ton of customers and they wanted to sell our existing products. And then we had a 3rd class of partners that would have fallen to that second category, but didn't want to sign up for the bar. So we still have partners that we consider under our bar model.

Speaker 2

These are the bigger customers who want to build things on top of illuminate. We've been our focus has been on the 2nd group is getting to a bigger group of potential partners And that's what the COE program allows. And the reason it allows is it's lower upfront costs, right? We're going to have a tier of COE that is free. It's our entry tier.

Speaker 2

But it's we're not trying to monetize the relationship as much. We are the direct relationship with the partner. We are trying to both have skin in the game, so we can go after their customers and help their customers solve a ton of problems. So that's what I meant when the transition is low upfront. Our COE deals are going to be less than our traditional bar deals on day 1.

Speaker 2

But they are set up to be focused more on the massive pipeline from the end customers that we can service together. And that's why I said over time, it's going to lead to a lot higher ARR. And it's also more focused, because they're selling our reselling our products or they're bringing us leads for our products as opposed to them building their own things on top of it. Does that answer your question a little bit?

Speaker 3

That's very helpful, I think, and provide some nice clarity on what's going on there. Maybe moving on here, if you look at some of the legislation that's progressing in Europe and Canada around plastic recycling, can you just give us any updates you have in terms of timelines, Any change in expectations you have on how the projects will progress relative to kind of be maybe public statements you've made previously? And maybe just any other relevant information that investors should be aware of with the current recycling opportunity?

Speaker 2

Yes, that's great. And I'll definitely point you back to the prepared remarks where it said our first partner in our new go to market motion. We they've told us they expect to sign a deal in the second half this year to start in a European country, which is huge. We're also expanding the number of partners we're in conversation with, both not just number of customers, but other countries. And we expect to have a whole another wave of additional potential partners that we're getting introductions to from a very powerful and wonderful partner of ours.

Speaker 2

So that's on the opening up Digimarc recycle markets, which is where our focus is. Holy Grail work continues. And if you refer the quarterly earnings snapshot, you'll see that there's some revenue coming in the back half of this year from the Holy Grail work, which is important. It's continued proof of concept. I've never seen 170 organizations do a very public POC on a single company software like Holy Grail is, it's wonderful, it's in so many different ways.

Speaker 2

Now the regulation, there's a ton of regulation. This is depending on who you talk to, top 3 problem are kind of our globe faces, right, is that we only have one planet and we got to solve for the plastic recycling issue. So kind of regulation, we don't want to wait for regulation to be the driver. Regulation is a wonderful tailwind. People can see the writing on the wall and see what's coming down from regulation.

Speaker 2

So I think it gives an urgency to the conversation, but we don't want to rely on that. We want to drive our own urgency. And so that's what we're really focused on in these conversations. So so that's what we're really focused on in these conversations for this new go to market, this partnership model, and Digimarc recycle.

Speaker 3

Got it. That's helpful. And then, you highlighted in the prepared remarks that in Q2 you demonstrated with your largest commercial customer the ability to carry a heavy load and a multi signal future. I know that you're limited with what you can discuss with this, but can you just discuss or maybe just from a high level explain what you were referring to maybe with this particular statement?

Speaker 2

Yes. I would point to the 2 developments that I I mean that fact is powerful, right, and interesting, but what's really important is the 2 developments that come from that side. The first and most immediately, we believe this customer more items in their store, including items produced by the national brands, the more profound the improvement in what they're trying to do will be. And then secondly, they understand the value of our owning more of a technology stack on the razor component. I'm using more of illuminate capabilities to build out the points of detection.

Speaker 2

Outside of reiterating Owen's words before, but I said on the call, I said, I can't provide any additional details, except I do want to stress 2 things. It's difficult to overstate the importance of these developments. These are important developments and we look forward to be able to talk about it more soon.

Speaker 3

Understood. And just one quick financial question for me. As you're looking at the operating expense growth for the balance of the year, I think aside from the adjustments that grew total expenses grew 2% year over year, which is great. How should we think about any increased hiring or expenses coming into the model for the second half of the year? Thanks, guys.

Speaker 2

Yes. Josh, we don't necessarily give guidance, but any direction I can just talk. We don't expect that we need to ramp up expenses significantly at all. And quite frankly, generally expenses are a little bit higher in the first half of the year than they are in the second half of the year, just given some of the year end compliance and things that we had in Q1. So we wouldn't expect to see material growth in expenses.

Speaker 2

Now obviously, at a much higher scale of revenue, there will be some additive expenses. But as I touched on in my prepared remarks, this business, we believe, has tremendous operational leverage. And you can start to see that where we're able to grow revenue at 39% and our expenses were pretty low. So, we can't say that the expenses won't grow, but they shouldn't have to grow at a significant amount even to reach a much higher scale.

Speaker 3

Awesome. Thanks, guys.

Speaker 2

Thanks,

Operator

Our next question is from Jeff Van Rhee with Craig Hallum.

Speaker 4

Great, thanks. Couple for me guys. Maybe first just can you quantify on the ARR what was the actual dollar impact of that churn to

Speaker 2

customer? Yes. So Jeff, we're not providing any other metrics around ARR at this point. Ending ARR is really our true north as a business. Providing other metrics at this point, and Tom, just given our scale, could be misleading.

Speaker 2

And therefore, we're not going to provide them at this juncture. We can't wait to be at the scale where we're providing more of those metrics like gross adds and churn and things like that. But at this point, we're not prepared to do that.

Speaker 4

Okay. Maybe I'll try on the multiyear Validate deal that you had. Can you talk more about that? You said it was a COE sourced deal. What's the size of the deal?

Speaker 4

What's the use case? Just little more clarity there.

Speaker 2

Yes. It's around it's low 6 figures per year ARR. It's a producer of products who has tried other ways to authenticate and stop both theft as well as diversion of their products and realized that we have a pretty good solution. So there's nothing I guess there is actually, I mean this is this CoE partner, it's a valued customer of theirs, right. So it's always great to start with a CoE partner's valued customer.

Speaker 2

It shows that relationship is off to a good start because they're putting us in front of their customers. We got to perform. We're not trying to solve the customers' problem. We're trying to make our partners look good and help them get more comfort in us and really build that partnership. But there's nothing, I would say, unusual or we love all of our deals, right?

Speaker 2

So it's not necessarily an exciting deal, but there's nothing unusual about it. It's just our first one that came through the COE program, which is a pretty quick turnaround. We launched the partnership in Q2 and signed our 1st partner sourced deal in the same quarter.

Speaker 4

Yes. Got it. That's helpful. And then I guess just lastly as it relates to the commercial customer that you referenced. What happened I mean, I know you can't get into specifics of that account and kind of what they're doing with your product.

Speaker 4

But I mean, clearly, they've had your product in hand for a long, long time. They've looked at it. And it seems highly intuitive that the more product that's marked, the more effective your platform is. And I guess just my first reaction to reading that or hearing that was what took so long that they're finally now just getting to that realization?

Speaker 2

Yes. I guess if you're looking at that from the original 2019 deal, I would benchmark it versus the deal we signed a couple of years ago, right? That's a different use case. It's next gen in store operations. And I know we talked a little bit about this on our fireside chat.

Speaker 2

It's ultimately up to the customer. When we're licensing our platform, right, it's up to the customer to really decide how best they want to build it. That was the second key development, Jeff, I was referencing here. They're understanding that the more that they use the capabilities to eliminate is a huge unlock. And then the if you go back to the 2019 deal, our focus across this company is on solving the problems front of mind for our customers.

Speaker 2

And when you look at the retail industry, there is far and away 2 things on the front of their mind, loss prevention, especially post COVID, but just in general, but it's getting worse. You're seeing big retailers taking out self checkout, right? Or putting more stuff behind locks. That is becoming real at the retail space. It really skyrocketed one of our top concerns.

Speaker 2

And the other one is next generation operations, right. The retail industry is, for the most part, they've had improvements, but it's kind of the same process for the last couple of decades. If we can build solutions that can address where the industry is going versus where they are, that's a huge unlock. If our solutions can not only add value to their existing processes, but also future proof them for the future ones, Jeff, those are wonderful conversations to be having with these people.

Speaker 4

Yes. Got it. And maybe sorry, this will be my last. On the gift cards, that's very interesting. I don't know if I came out of nowhere, but certainly showed up quickly, the materiality of it, the way you're describing it and the pace at which it showed up.

Speaker 4

You talked about the all these attack vectors on gift cards. Can you just give us a 22nd education on a little more of the opportunity around gift cards? And then, I don't know, any sense on timing? I realize it's just a swag, but how quickly can these result in

Speaker 2

ARR? So in terms of the attacks, there's multiple vectors of attacks. They roll into a couple of big high top level ones, right? 1 is draining, so getting a gift card that you believe has money on it, but the money is already been stolen. And the second one is social engineering.

Speaker 2

Those are the 2 main vectors, but there's a bunch of other vectors and there's a bunch of sub attacks within those vectors. But it's basically they're buying a gift card that you should have had value on it and it does it when you get it or else social engineering and attacking again, Most of these social engineering attacks go after the elderly or so those are the 2 big problems become an issue, not just just to the industry as a whole. The only thing this the gift card industry is massive globally in terms of the total amount of money that is stored on these cards and it's growing at incredibly big largely. The only growing faster is the attacks because this industry has tried a lot of older analog type technologies that you've just proven not to be up for the challenge of really dedicated group of thieves because of the size of the gold at the end of the rainbow. So it's tough to get into exactly how we're solving all the problems.

Speaker 2

This is the tough again, we identify and authenticate things. Identify, we love to talk about it authenticating. Part of we don't want to get too far into what we're doing, but we have multiple different solutions, multiple different implementations, as I mentioned. And then it's sort of timing state too. I mean, there's we don't know what we don't know.

Speaker 2

As I mentioned, the pace at which this is evolving and the engagement is unlike anything I've ever seen, it is remarkable. The goal on this call was to introduce the idea, just so you all have awareness of it because like I said at the beginning, our confidence we have a solution and the materiality to our business if we're right. Stay tuned.

Speaker 4

Fair enough. Thank you.

Speaker 2

Thanks, Jeff.

Operator

Our next question comes from Jeff Bernstein with Silverburn and Bernstein.

Speaker 2

Hi, guys. Thanks for letting me ask the question. I just wanted to get an update on the California legislation and whether you think that might actually get voted through, I guess, their Senate this summer? And then I guess there's some different legislation that's starting to percolate for the U. S.

Speaker 2

Government as well relating to AI and deepfakes. Yes. So on AB-three thousand two hundred and eleven, I mean, we're just absolutely thrilled to be part of this conversation, not only because can make a real impact to a really pressing problem, but also because it just it speaks to our recognized leadership in digital watermarking, right. They approached us to as the experts. And probably goes without saying, but I'll say it we're widely in favor, not only because we know of that the implementation in the solutions and it's not just digital watermarking.

Speaker 2

This is a very comprehensive bill. 3,211 will work. And the technology behind it, which is a lot of digital watermarking based stuff. Well, of course, that we know will work. Trying to predict how legislation moves through any processes is probably beyond my ability to do.

Speaker 2

I can tell you right now, this is an update. It's currently in the Senate Appropriations Committee and what's called the suspense file, which is where I forget the hurdle, but any bill that has above a certain very low bar for financial impact gets put in a suspense file. And we're waiting for progress out of that. We provided direct feedback on the content. We've testified on this, and we're just as anxious awaiting progress as you are, Jeff.

Speaker 2

Got you. And then on the federal level, are they also kind of going to the same path in terms of digital watermarking and other technologies that will be in there? Yes. At the federal level, there's a lot of different bills talking about this. If you recall, we were at the AI Insight forums.

Speaker 2

We were also a founding member of the NIST, which is a National Institute For Standards and Technology. We're a founding member of their AI initiatives group. So we're supporting at the federal level as well. What's remarkable is how quickly AB3211 is moving. California has a history of leading, but not just the country, but the world in big, big important things.

Speaker 2

So we love all of and again, this is not just a problem facing the U. S, this is a global problem. So we're supportive and we're trying to do all we can to help educate governments and regulatory bodies globally, because this is a big problem. And I think the outcome of this is wonderful. We believe this can truly deliver the safer, fair and more authentic Internet we've all deserved since the Internet was created.

Speaker 2

It'll be great to get the 15th largest country signed up. So looking forward to that.

Operator

Thank you. There are no further questions at this time. And I would like to turn the call back to Riley McCormack for closing remarks.

Speaker 2

Well, thank you everybody for joining us this afternoon. I hope you have a great rest of your day.

Operator

Thank you. This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.

Powered by Quartr
Earnings Conference Call
Digimarc Q2 2024
00:00 / 00:00